Earnings Call Transcript - GROW Q4 2024

Holly Schoenfeldt, Director of Marketing

The presenters for today's program are Frank Holmes, U.S. Global Investors' CEO and Chief Investment Officer; Lisa Callicotte, Chief Financial Officer; and myself, Holly Schoenfeldt, Director of Marketing. On the next slide, during this webcast we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don't pertain to historical facts are subject to risks and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-K filing for more detail on factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today and U.S. Global accepts no obligation to update them in the future. And on the next slide, as always, we would love to offer anyone tuned in today one of our JETS, GOAU, or SEA hats. All you have to do is send us an email with your physical mailing address, and you can send that to info@usfunds.com. On the next slide, I will briefly review our company. U.S. Global Investors is an innovative investment manager with vast experience in global markets and specialized sectors. We use a quantum mental strategy to create smart beta 2.0 products. The company was originally founded as an investment club, becoming a registered investment adviser in 1968. The company has a long-standing history of global investing and launching first-of-their-kind investment products, including the first no load gold fund. We're well-known for our thematic investing in gold and precious metals, natural resources, airlines, and luxury goods. On the next slide, just a little bit more about us for anyone new tuning in today. We have over 30 years of experience and we are located in San Antonio, Texas. We manage six mutual funds and three exchange-traded funds. And in addition, we have over 100,000 readers who are subscribed to our award-winning financial blog, Frank Talk, and our weekly investment newsletter, The Investor Alert. On the next slide, I just want to quickly thank our top institutional shareholders, which as you can see are the Vanguard Group, Franklin Templeton, and Perritt Capital Management. On the next slide is where I want to hand it over to Frank Holmes, CEO. Frank?

Frank Holmes, CEO and Chief Investment Officer

Thank you, everyone, and all the shareholders. Let's go through my presentation as Chief Investment Officer and CEO to explain the changes in the capital markets regarding our fund products and how we're adjusting to external influences. In this visual, you can see that over the five-year period from June to June, GROW outperformed the Russell Microcap Index. The outcomes can vary depending on the specific time period you choose to analyze. It's important for investors to remember that while short-term market forces can affect our fund flows, these impacts are usually temporary and can change rapidly, which will also influence our stock prices. Over that five-year journey, we experienced significant volatility in one-day and 10-day periods. I want to remind investors that each asset class has its own inherent volatility characteristics. For example, the S&P 500, gold bullion, and the Dow Jones Asset Managers Index typically fluctuate around 1% about 70% of the time on a daily basis. Over a 10-day period, the S&P shows a volatility of about 2%, while gold is at 3%, and asset managers reach 4%. Thus, over 10 days, we align closely with the Dow Jones U.S. Asset Managers Index, which has a volatility of around 4%. Historically, this was even higher, particularly back in the 90s, when it tracked closely with money market funds. When I first moved to Texas and focused on enhancing our money market fund, which was initially driven by significantly higher yields, that fund grew to $1 billion in assets. This growth was pivotal in supporting our stock price. We also found that our performance had a strong correlation to gold prices for a long time; we were more profitable than most gold stocks while managing our gold funds, even achieving a global number one ranking. I've mentioned oil as a comparison because it's the most widely traded commodity, and our GOAU ETF includes gold stocks. It's noteworthy that gold stocks exhibit twice the volatility of bullion over a 10-day period. Airlines are even more volatile with a 7% fluctuation over 10 days, mainly due to oil costs. In our JETS ETF, the price of oil in relation to its 50-day moving average has an inverse relationship with airline indices, given that oil costs are a significant expense for airlines. Our investment in HIVE in September 2017 marked our initial step into crypto mining. Although we aimed to launch a Bitcoin mining ETF, the timing wasn't right until this year, which made our early investment beneficial. Our initial investment exceeded $3 million, and due to interest payments and other factors, it has grown to approximately $21 million, representing a significant victory for our shareholders. Each asset class has a unique volatility profile, and understanding this is essential for strategic investment. Regarding macro trends, we are facing ongoing challenges with our mutual funds. Actively managed domestic equity funds are experiencing continued redemptions and closures at a faster pace than shutting down an ETF. Launching an ETF is much more straightforward. The fees are lower, and if a theme doesn't resonate, winding down is much simpler. On a positive note, there has been a surge in actively managed domestic equity ETFs since 2022. Warren Buffett highlights the benefits of stock buybacks at accretive prices for all shareholders, including myself, as I am the largest holder. Warren recently celebrated his 94th birthday on August 30, and he has an impressive cash reserve nearing $300 billion, ready for investments during market corrections. His insight is invaluable to our Board of Directors, where we have a wealth of expertise. Regarding our stock buybacks, we believe our stock is undervalued; therefore, we repurchase shares when the price dips below the previous trading day using an algorithm. This is part of our strategy to enhance shareholder value through increased dividends and annual stock repurchase amounts. Regular assessments are conducted by the Board, but we approach our capital management with caution, avoiding any rash decisions. We are committed to exploring product initiatives that attract investor interest. As shown in this visual, stock repurchases have increased due to our view of undervaluation. Despite lower stock prices, we've intensified share buybacks, demonstrating a remarkable upward trend in repurchases since 2022. We sustained our monthly dividend since 2007, even throughout the financial crisis. We've weathered numerous challenges, maintaining our discipline, which is reviewed quarterly by our Board. Currently, the yield stands at 3.5%, thereby enhancing our attractiveness compared to bonds over the same period. Next, please. Looking at fiscal year 2024, our company has demonstrated steady cash flow despite macro market challenges affecting mutual funds. Moreover, we maintain a robust balance sheet encompassing cash and other investments while continuing to execute stock buybacks during flat or declining days and pay dividends monthly. Next, please. As both CEO and CIO, I control approximately 19% of the company's equity, holding nearly 99% of its voting shares. This structure, mandated by the SEC years ago, ensures stability in voting control, thus reducing expenses associated with changing hands of shares. It sets a two-tier system, but we've always prioritized disciplined management of U.S. Global. Our three independent Directors hold extensive expertise, complementing a solid governance structure. Our Chairman possesses CPA and legal backgrounds, while other Directors, including Jerry Rubinstein and Roy Terracina, bring invaluable capital market experience. Additionally, Tom Lydon, an ETF pioneer, contributes to our board with substantial industry insight. Next, please. We've embraced quantum mental research, which amalgamates quantitative analysis with fundamental study. This aims to capture notable trends, enabling investors to leverage discernible themes that inform smart investments. We were early in recognizing and profiting from the China growth story and the Eastern European Fund, with significant growth during that time, especially post Berlin Wall's fall. The launch of the Eastern European Fund was a pivotal move, despite the crises that ensued. After geopolitical disturbances, like the recent Russian aggression, even top-performing Funds, such as our Global China and Emerging Europe Funds, faced declines in investor interest. Fortunately, we sidestepped significant losses by selling our holdings in Russian stocks prior to the invasion. Though two once-profitable funds were shut down, the appalling sentiment regarding certain regions remained out of our control. But at U.S. Global, we regulate our smart beta products based on thorough regression analysis across market cycles to maintain rigorous standards each quarter. We determine when and where to capitalize on themes without compromising our analytical foundations. Next, please. U.S. Global has announced the merger of Europe-Domiciled Airlines ETF into Travel UCITS ETF, known as TRIP, on the London Stock Exchange. We're enthusiastic about this shift. Unlike JETS, TRIP encompasses cruise line stocks and luxury hotel firms while JETS focuses more on air travel logistics. This change inevitably comes with costs that have impacted our operational cash flow in the past year, but we remain highly optimistic. Next, please. Sustainable thematic products leveraging a smart beta 2.0 framework necessitate extensive back-testing and continuous assessment every quarterly cycle. U.S. Global's mission is to ensure investors feel financially secure as their wealth expands consistently. While we don't dictate when to transition asset allocations, our products equip investment advisors and individual investors alike with tools for effective management. Furthermore, our stock buyback algorithm is programmed to act on flat and down days, coupled with prudent cash preservation strategies for upcoming growth opportunities and potential market corrections. Lastly, we are enhancing M&A endeavors to incorporate more funds, elevating our subscriber base and branding initiatives. Next, please. Mebane Faber has popularized the concept of total shareholder yield as a superior yield investment approach. This considers how free cash flow is allocated for dividends, stock buybacks, and debt reduction. As we bear no debt, our yield essentially comprises dividends and stock repurchases relative to the market cap, allowing a comparative evaluation to prevailing Treasury yields. Next, please. Consequently, our total shareholder yield is remarkably appealing at 9.41%. Next, please. In looking at the five-year treasury yield currently at 4.33%, the majority of dividend-centric models correlate with five-year risk-free Treasury yields. Interestingly, the relationship between five- and ten-year yields can inform our strategies. The past trend where five-year yields exceeded ten-year rates reflected an inverted yield curve, indicative of potential economic downturns which we keenly track, using strategies that focus on shareholder yields through stock buybacks and dividend payouts. Next, please. Comparing our operational strategies with larger firms like Invesco and WisdomTree, it's evident that we leverage unique market dynamics within the ETF domain. Our emphasis on ETFs, accounting for 86% of our operational revenue, places us in a competitive, appealing position while continuously enhancing our overall cash flow through strategic restructuring and buybacks. Next, please. For the financial year ended June 30, we repurchased 767,751 Class A shares at a cost of approximately $2.186 million. Next, please. Now, I must highlight the extraordinary rise in assets for JETS during COVID, leading to unprecedented success. Few fund groups can claim a similar trajectory, with the growth in assets under management soaring, especially during this turbulent time. When COVID struck, JETS was uniquely positioned and attracted investors anticipating a rebound in airline revenue, fulfilling that potential. Before COVID, travel numbers hovered around 2.5 million daily travelers, a figure that plummeted to about 80,000 at the pandemic's depths. Today, that figure has surpassed 3 million. This striking recovery bodes well as airlines are consistently profitable; a positive outcome amidst significant industry challenges. Next, please. Analyzing significant revenue growth among the four largest airlines, whose operations represent 65% of all U.S. travel, affirms the industry's resilience. Notably, revenue rose 840% over a four-year period, while EBITDA surged about 178% across that same time span. Despite such growth, JETS has faced redemptions. This disconnect has led to frustration; we're actively promoting the intrinsic value of our assets amidst a backdrop of investor apathy. Next, please. The overarching sentiment stemming from the prolonged inverted yield curve undoubtedly influences investor outlook. To date, we’ve observed an unprecedented record of 783 consecutive days with an inverted curve, adversely affecting airline sentiment. Good news, however: we recently saw a reversal. Next, please. Visual data illustrates how JETS' market cap is entwined with fluctuations in two-year and ten-year Treasury yields. This negative sentiment, propelled by concerns around a looming recession, has directed investor apprehension toward the airline sector. Next, please. An additional point of interest lies in oil's influence on airline trading, whereby hedge funds strategically short airlines when oil prices exceed the 50-day moving average causing fluctuations in stock performance in JETS. This strategy alongside the price of oil forms an integral narrative for us to convey. Next, please. To elaborate on the Purchasing Managers Index (PMI), it offers critical insights that can forecast economic shifts compared to historical data. This assists with commodity analysis, particularly within sectors like gold. Observations reveal trends in PMIs can precipitate significant transitions, especially around election cycles, posing risks for government stability. A notable decline in PMIs correlates with increasing uncertainties in global markets. As we track these indicators, we remain poised to adapt to changing realities. Next, please. Our quantum mental investment strategy elevates smart beta 2.0, merging cutting-edge technology with extensive data analyses for optimal returns and effective risk management. This analytical rigor additionally informs our investment decisions. Next, please. Our empirical performance, indicated against substantial indices, illustrates our success; despite market downturns, we have consistently outperformed. Implementing robust strategies through our smart beta models provides distinct advantages over time, ensuring our effectiveness for shareholders. Next, please. Despite the hurdles of obtaining proxies and restructuring efforts, we have successfully expanded internationally, specifically launching JETS in Colombia. Recognizing global market demands, our initiative is particularly critical as airlines contribute significantly to economic growth, constituting around 9% of global GDP. Through expansion, we aim to solidify our product's foothold as we engage with local pension funds. Next, please. Currently, around 40 million individuals identify as digital nomads, representing a noteworthy demographic shift that underscores the importance of exploring tourism-centric opportunities. As air travel rebounds, we anticipate a $2.5 trillion contribution from the airline sector to the U.S. economy, signifying the industry's robust recovery. Our strategic focus on branding and establishing a tight niche within this theme is crucial moving forward. Next, please. In light of global economic challenges, it’s significant to note that government interest payments have surpassed $1 trillion, engendering apprehensions around currency debasement and an increasingly favorable climate for gold investments. Next, please. Despite gold’s peak, we’ve witnessed volatility in gold equity flows, indicative of investor sentiment struggles in embracing gold as a vital asset class. Our GOAU ETF, however, continues to show promise with an upward trajectory despite industry-wide hurdles. Next, please. We generated a robust 9.41% total shareholder yield, which serves as a compelling differentiation from competitors. With management actively buying back stock while maintaining attractive yields, we are effectively optimizing returns for shareholders. Next, please.

Lisa Callicotte, CFO

Thank you, Frank. Good morning. I will begin with a brief overview of our compensation structure. We believe our compensation plan supports the recognition of achievement and emphasizes performance and results. Looking at the next slide, you will see that our employee base salaries have generally been modest, and bonuses for employees are directly tied to individual and team performance outcomes. Our CEO's executive bonus is based on operating earnings, with a cap set at a predetermined amount. Additionally, he receives bonuses tied to annual net realized gains on investments and fund performance bonuses related to our investment team's results. This framework aligns our CEO's interests with those of our shareholders, promoting efforts to grow average assets, which in turn boosts revenue and operating income, while only rewarding net realized gains on investments. Consequently, fluctuations in the value of corporate investments do not affect the executive bonus calculations. Only investments that have a recognized realized gain are considered in the executive bonus. Now, on Slide 57, we present our financial highlights for fiscal year 2024. Average assets under management reached $1.9 billion, with operating revenues of $11 million and a net income of $1.3 million, or $0.09 per share. Slide 58 details our earnings breakdown, showing operational earnings from advisory fees and other earnings primarily from both realized and unrealized gains and losses on our investments. Both our advisory earnings and investment gains and losses are influenced by market conditions. In the next few slides, you will see more detail about our operations. Starting on Slide 59, our total operating revenues are $11 million for the year, reflecting a decrease of $4.1 million, or 37%, from the previous year's $15.1 million. This decline is mainly attributed to a reduction in assets under management, particularly in our JETS ETF. Operating expenses for the current quarter amounted to $11.5 million, remaining relatively unchanged compared to the prior year. As Frank highlighted, we've incurred higher fund expenses this year due to the proxy costs associated with eliminating performance fees for our equity mutual funds and the expenses linked to our European UCITS merger. These moves are intended to create incentives for our future growth. The removal of performance fees is expected to reduce volatility in mutual fund advisor fees, making them more consistent with other mutual fund fees. The European UCITS merger has boosted our UCITS assets under management, and the fee rose from 65 basis points to 69 basis points. On Slide 60, we report an operating loss of $480,000 for the year ending June 30, 2024, which is a negative shift of $3 million compared to fiscal year 2023. Other income increased by $1.8 million year-over-year, primarily due to improved investment income this year. We also experienced lower realized and unrealized losses on equity securities compared to last year. Our net income after taxes for the year was $1.3 million, or $0.09 per share, marking a decrease of $1.8 million from our net income of $3.1 million, or $0.22 per share, in fiscal year 2023. Moving along to Slides 61 and 62, we showcase a robust balance sheet with high levels of cash and securities. On Page 63, you can see that we have no long-term debt. The company boasts a net working capital of $38.2 million and a current ratio of 18.6 to 1.

Holly Schoenfeldt, Director of Marketing

Thank you, Lisa. All right. On the first slide in my section, I just want to quickly point out a stat about our website traffic during the fiscal year. As you can see here on the map, we had nearly 400,000 readers from around the world visit usfunds.com. Many were repeat visitors, but we had even more new visitors who found our content from third-party syndication primarily, so we're really proud of that. And on the next slide, we are also proud to report that this year we hit 10,000 subscribers on our YouTube channel. This is primarily organic growth, and now we have actually surpassed this number. So, if you haven't had a chance to check out our content here, I highly encourage you to do so and subscribe so that you can get an update anytime any new videos are posted. On the next slide, you will see here some of the videos on our YouTube channel. We love educating our shareholders through video content, and we do so on various topics ranging from gold to bitcoin and airlines and luxury goods. All right. Moving on to the next slide, I want to highlight some of our most popular Frank Talk blogs so far in 2024. The Frank Talk blog is actually one of the very first financial blogs out there, and in 2024, it celebrated its 17th year in publication. Signing up is completely free at usfunds.com, or you can also subscribe to the Investor Alert newsletter, which comes out every Friday afternoon and is a weekly analysis from both Frank Holmes and our entire investment team on the market-moving events for that week. Moving on to the next slide, this is just a quick snapshot of our total subscriber growth over 12 months. As you can see, not only are our major social platforms growing consistently, so are our Frank Talk and Investor Alert subscriber lists. So, this is something we're very proud of, and they all serve as an excellent way to communicate with our current shareholders and, of course, potential shareholders. So, finally on the next slide, I do want to encourage you all to follow us on all of these platforms just so you're up to date with what's going on with GROW, our funds and, of course, the broader market. So, just as a reminder, as we conclude today, if you do have any questions, please email those to info@usfunds.com, and we will gladly follow-up with you to get anything clarified that you may need more information on. Thank you all for tuning in today, and that concludes our webcast summarizing the fiscal year-end 2024.